The Marxist exploitation theory says that a laborer is exploited by a capitalist because the laborer produces commodities, and when the capitalist sells said commodities, they sell them for more than they pay the laborer. Marxists also accuse capitalists of being lazy and not contributing. A Marxist may point to the relationship between a barista and their employer. The barista makes and sells X amount of lattes, which leads to Y amount of profits coming in. But the barista is paid based on an hourly wage, which could be less than the total amount of Y. Marxists claim that this is “exploitative” and that the barista should, instead, be paid all of Y. They believe that the laborer is entitled to the entire value of the product. This comes from their adherence to the labor theory of value.
The Marxist analysis fails on many grounds. The labor theory of value was discredited long ago with the marginalist revolution. A lesser-known problem with Marx’s exploitation theory is that it fails to account for an economic phenomenon known as “time preference,” as economist Eugen von Böhm-Bawerk pointed out. Time preference is the assumption that with everything else held constant, humans prefer a given end to be achieved sooner rather than later.
The reality of time preference can be demonstrated through something called the Marshmallow Experiment. The experiment was developed by Stanford psychologist Walter Mischel and is one of the most famous psychology experiments ever. In the experiment, a child (usually around 5–6 years old) is placed in a room under observation and offered one sweet (usually a marshmallow). The child is typically more than happy to accept the treat, but the twist comes when a second option is presented: if the child abstains from eating the marshmallow for 15 minutes in the room alone, then they get two marshmallows. Many kids are excited at the opportunity to double their treat, but a portion of them still fail to abstain from the first marshmallow and thus lose out on the reward.
Why would a child eat one marshmallow when they could have two? After all, aren't two better than one? Not exactly. The child’s actions show us that they do value one marshmallow more than two, but only when the factor of time is added. Every minute spent waiting for the second marshmallow is a minute spent not enjoying the first. Another minute of not satisfying their craving.
The preference for one immediate marshmallow over two in the future is referred to as "high time preference," while those who wait for two have "low time preference." Following the original experiment, it was observed that the time preferences exhibited by the children tended to stay with them as they grew. For example, kids who expressed lower time preferences tended to be more economically successful as adults.
To see how time preference is relevant to employment and wages, let’s consider two hypothetical child participants in the marshmallow experiment: Christianna and Carlos.
Christianna and Carlos were two young children participating in the classic psychology experiment known as the marshmallow test. The children were each given a single marshmallow and told that if they waited 15 minutes without eating it, they would be given a second marshmallow as a reward.
As the timer began, Christianna sat patiently, her eyes fixed on the tempting treat before her. She fidgeted a little and glanced around the room, but ultimately she managed to resist the urge to eat the marshmallow. Carlos, on the other hand, couldn't wait even a minute. He grabbed the marshmallow and stuffed it into his mouth, devouring it with gusto.
As they grew older, Christianna and Carlos began developing very different life approaches. Christianna learned the value of patience and self-control, choosing to save up her money and focus on her long-term goals. She eventually opened up her own coffee stand, where she worked tirelessly to build a successful business.
Carlos, on the other hand, was always focused on immediate gratification. He spent his money as soon as he earned it, never worrying about the future. He was constantly searching for new ways to indulge his every desire, no matter how fleeting or superficial.
Despite his best efforts, Carlos never seemed to find true happiness or fulfillment. He bounced from one job to the next, always seeking the next thrill or pleasure. Eventually, he found himself working as an employee at Christianna's coffee stand, serving the drinks she had worked so hard to create.
As he watched Christianna's business thrive, Carlos began to realize the value of patience and long-term thinking. He learned that true success and happiness came from putting in the hard work and making sacrifices in the present to build a better future. And he knew that it was all thanks to the lesson he had learned from the marshmallow test all those years ago.
Eugen Bohm Bawerk in Capital and Interest argued that the idea that a worker should receive the full value of their product could be understood to mean either that they should receive the full value of the product at the time it is produced or that they should receive the full value of the product at some point in the future. However, socialists interpreted this idea to mean that the worker should receive the full future value of their product immediately at the time of production.
We can see Carlos is not exploited because he showed he valued immediate consumption more than future consumption. He prefers a small amount of present money over a larger amount of future money. Christianna has a reverse preference order and ranks more future money more highly than less present money. These different preferences create an opportunity for mutually beneficial exchange. Without Christianna’s expectation of a return on her time and money invested, Carlos would be worse off because he would have to wait out his current consumption. Without Carlos’ preference for present consumption, Christianna would be worse off because she wouldn’t be able to expand her business and assets without additional labor.